"The High Representative expresses his concern after the Israeli decision to issue building permits for the E1 project in Maale Adumim," the EU's Javier Solana said in a statement issued late on Thursday.
"This decision contravenes the commitment of the parties to abstain from any unilateral measure that could affect the final settlement as the Quartet recalled in London on March 1," he said, referring to the group of international mediators - the United States, Russia, the EU and the United Nations.
The EU expected Israel to respect its obligations under the road map, which included a freeze on Jewish settlements in occupied territories, Solana said.
The peace plan, adopted in 2003, provides for reciprocal steps by the Israelis and the Palestinians, leading to the creating of a provisional Palestinian state.
Israel is supposed to halt all settlement activity in the first phase, in return for security measures to end violence which new Palestinian President Mahmud Abbas is implementing.
The Maale Adumim settlement is
at the centre of the latest row
Government sources said on Monday that Israel plans to build thousands of new homes linking Maaleh Adumim, situated between Jerusalem and the Dead Sea on land captured from Jordan in the 1967 Middle East War, to Jerusalem.
The decision is seen as a move to compensate supporters of right-wing Prime Minister Ariel Sharon for his plan to withdraw from the Gaza Strip this year, uprooting 8500 settlers in 21 settlements, and easing the passage of the state budget by the end of March, without which his government will fall.
The international community regards the Israeli settlements, home to 235,000 Jews, as illegal and an obstacle to peace. Israel disputes this.